Branching Blockchains: Explaining Ethereum Forks

dYdX
Branching Blockchains: Explaining Ethereum ForksBranching Blockchains: Explaining Ethereum Forks

As blockchains like Ethereum get older and technology and hackers get more advanced, it’s important for the blockchain’s underlying code, or smart contracts, to remain top notch.

Enter forks, which are software updates that add new features, patch security holes, and resolve disagreements between competing camps with different visions of the project’s future.

In this guide, we’ll review the fundamentals of Ethereum forks, including what they mean, their historical examples, and why blockchains fork. We’ll also discuss how forks continue to shape the crypto market.

What is a fork in Ethereum?

In open-source software development, a fork happens when a developer or group of developers makes a copy of an existing project to take it in a different direction from its current path. Like a fork in the road, a software fork results in two diverging branches with the exact same history right up to the point where the split occurs.

Many cryptocurrencies, including Ethereum (ETH), have an associated blockchain, a series of linked blocks of data representing transactions secured and validated by a decentralized network of computers (aka nodes). Since Ethereum is an open-source software project, it can be forked just like any other piece of software.

When a fork takes place in Ethereum or any other open-source blockchain project, the rules of the underlying blockchain change. Most often, these forks are routine upgrades supported by most community members. Sometimes, however, they’re contentious, meaning the community is split about whether the fork is a good idea––some nodes choose to follow the new rules, while others elect to stick with the old ones. This results in a forked codebase, two distinct projects, and a forked community, as each side fights to become known as the dominant, original, or canonical chain.

What are Ethereum hard forks?

A hard fork occurs when an update to the code changes the blockchain’s rules, so nodes that don’t update their software to the new rules can’t produce new transaction blocks. In other words, hard forks introduce software changes that aren’t backward-compatible. Nodes that don’t adopt the new rules can’t participate in the network or receive rewards for producing new blocks.

When many nodes reject a hard fork, this results in a split: two distinct blockchains with the same history up to the hard fork’s introduction but divergent futures and rules for creating new blocks.

A few of the most notable Ethereum hard forks include:

The DAO fork

A DAO, short for decentralized autonomous organization, is a blockchain-powered organizational structure. DAOs operate without the traditional hierarchy seen in conventional corporations, relying instead on smart contracts to execute their governance and operational rules autonomously. 

The DAO fork is one of the most contentious Ethereum hard forks that took place on July 20, 2016. The DAO was a decentralized crypto trading fund for Ether and Ethereum-based tokens that counted among its members many of the most well-known and wealthiest figures and traders in the Ethereum landscape. 

When a hacker found a bug in the DAO’s code that enabled them to drain 3.6 million ETH from the DAO’s holdings, the community leaped into action to fork the chain to allow depositors to retrieve their funds. A sizable proportion of the Ethereum community believed the fork went against the principle that blockchain transactions should be immutable—impossible to reverse—and continued to mine and build on what they viewed as the original chain. This chain was dubbed Ethereum Classic and is still mining blocks today.

Ethereum Byzantium fork

The monumental Byzantium hard fork occurred in October 2017. Byzantium incorporated nine proposals to improve the Ethereum blockchain’s privacy, security, and scalability. 

Specific changes included the ability to stop smart contracts from consuming all gas fees when an error occurs, reducing the block reward from five ETH to three ETH, and delaying the “difficulty bomb” that would make mining unprofitable in preparation for the switch to proof-of-stake (PoS).

The Merge

The Merge ETH fork transitioned Ethereum from a proof-of-work (PoW) blockchain, where miners compete using large amounts of computing power to secure the network and produce the next block for a reward, to a PoS blockchain, where stakers secure the network and produce blocks by depositing a stake in the blockchain’s native cryptocurrency (ETH) that can be penalized if other nodes detect malicious behavior. 

PoS blockchains are dramatically more environmentally friendly than PoW blockchains and often allow for faster and cheaper transactions. The Merge took place on September 15, 2022.

Hard forks versus soft forks 

Like hard forks, soft forks are updates to a blockchain’s underlying code, with the primary distinction that blocks mined under the old rules are still valid after the fork. This means that nodes that don’t update their code won’t be left behind; instead, they’ll continue to participate in the existing blockchain by producing and validating new blocks.

Comparing the two types of forks, hard forks introduce new rules that are less restrictive than the old ones, so nodes that don’t update their software will reject blocks that follow the new rules. On the other hand, soft forks introduce more restrictive rules, so even nodes that follow the old rules will accept blocks produced by updated nodes.

To illustrate, consider a soft fork that changes the block size—the maximum size of all transactions in a block—from two MB to one MB. In this case, since the new block size is smaller than the old block size, nodes that follow the old rules will still accept any block produced by the updated nodes since these blocks will always have a block size less than the original maximum of two MB. 

Conversely, if a hard fork changes the block size from one MB to two MB, blocks that follow the old rules will reject any new blocks that exceed the original block size limit of one MB, resulting in a chain split and two distinct blockchains.

Why do blockchains fork?

Blockchains like Ethereum or Bitcoin fork for various reasons. Here are a few:

  • Adding new functionality: Like any software upgrade, one of the most common reasons for conducting a fork is to add new functionality. Ethereum’s most prominent example was the Merge.
  • Patch security loopholes: Ethereum forks often include security updates to strengthen the blockchain and prevent bad actors from causing harm. For example, the Byzantium fork included several updates to improve security.
  • Resolve disagreements: The most notorious fork type occurs when there’s disagreement about a project’s future trajectory. The DAO fork is the most famous example.

How do forks continue to modify cryptocurrencies?

Forks are used for routine upgrades and not just during community disagreements. They’re the key drivers of change in open-source blockchain systems. 

For example, Ethereum’s March 2024 Dencun upgrade introduced several significant enhancements. Key changes included proto-danksharding to optimize data storage and reduce layer-2 transaction fees, consensus upgrades, and improved gas efficiency.

What are Ethereum Improvement Proposals?

Every planned Ethereum fork is preceded by an Ethereum Improvement Proposal (EIP), a document specifying proposed changes to the Ethereum blockchain. 

EIPs are often highly technical and tend to be written by Ethereum blockchain developers or highly skilled developers of well-known projects building on the network, but anyone is welcome to contribute an EIP to the community. Much of the discussion about the blockchain’s direction centers around EIPs, and only those that gain wide approval among the Ethereum community make it into a fork.

Begin your fork-trading journey on dYdX

Interested in obtaining some forked funds? Trade Ethereum Classic and dozens of other cryptocurrencies and perpetuals with low fees, deep liquidity, and up to 20x buying power on our decentralized exchange. Learn more about our platform and products on our official blog

Also, check out dYdX Academy, our education hub that houses a wealth of beginner-friendly guides on all things crypto.

Start trading on dYdX today.

Disclosures

The content of this article (the “Article”) is provided for general informational purposes only. Reference to any specific strategy, technique, product, service, or entity does not constitute an endorsement or recommendation by dYdX Trading Inc., or any affiliate, agent, or representative thereof (“dYdX”). Use of strategies, techniques, products or services referenced in this Article may involve material risks, including the risk of financial losses arising from the volatility, operational loss, or nonconsensual liquidation of digital assets. The content of this Article does not constitute, and should not be considered, construed, or relied upon as, financial advice, legal advice, tax advice, investment advice, or advice of any other nature; and the content of this Article is not an offer, solicitation or call to action to make any investment, or purchase any crypto asset, of any kind. dYdX makes no representation, assurance or guarantee as to the accuracy, completeness, timeliness, suitability, or validity of any information in this Article or any third-party website that may be linked to it. You are solely responsible for conducting independent research, performing due diligence, and/or seeking advice from a professional advisor prior to taking any financial, tax, legal, or investment action.

You may only use the dYdX Services in compliance with the dYdX Terms of Use available here, including the geographic restrictions therein.

Any applicable sponsorship in connection with this Article will be disclosed, and any reference to a sponsor in this Article is for disclosure purposes, or informational in nature, and in any event is not a call to action to make an investment, acquire a service or product, or purchase crypto assets. This Article does not offer the purchase or sale of any financial instruments or related services.

By accessing this Article and taking any action in connection with the information contained in this Article, you agree that dYdX is not responsible, directly or indirectly, for any errors, omissions, or delays related to this Article, or any damage, injury, or loss incurred in connection with use of or reliance on the content of this Article, including any specific strategy, technique, product, service, or entity that may be referenced in the Article.

Legitimacy and Disclaimer

Crypto-assets can be highly volatile and trading crypto-assets involves risk of loss, particularly when using leverage. Investment into crypto-assets may not be regulated and may not be adequate for retail investors. Do your own research and due diligence before engaging in any activity involving crypto-assets.

dYdX is a decentralised, disintermediated and permissionless protocol, and is not available in the U.S. or to U.S. persons as well as in other restricted jurisdictions. The dYdX Foundation does not operate or participate in the operation of any component of the dYdX Chain’s infrastructure.

The dYdX Foundation’s purpose is to support the current implementation and any future implementations of the dYdX protocol and to foster community-driven growth in the dYdX ecosystem.

The dYdX Chain software is open-source software to be used or implemented by any party in accordance with the applicable license. At no time should the dYdX Chain and/or its software or related components be deemed to be a product or service provided or made available in any way by the dYdX Foundation. Interactions with the dYdX Chain software or any implementation thereof are permissionless and disintermediated, subject to the terms of the applicable licenses and code. Users who interact with the dYdX Chain software (or any implementations thereof) will not be interacting with the dYdX Foundation in any way whatsoever. The dYdX Foundation does not make any representations, warranties or covenants in connection with the dYdX Chain software (or any implementations and/or components thereof), including (without limitation) with regard to their technical properties or performance, as well as their actual or potential usefulness or suitability for any particular purpose, and users agree to rely on the dYdX Chain software (or any implementations and/or components thereof) “AS IS, WHERE IS”.

Nothing in this post should be used or considered as legal, financial, tax, or any other advice, nor as an instruction or invitation to act by anyone.  Users should conduct their own research and due diligence before making any decisions. The dYdX Foundation may alter or update any information in this post in the future at its sole discretion and assumes no obligation to publicly disclose any such change. This post is solely based on the information available to the dYdX Foundation at the time it was published and should only be read and taken into consideration at the time it was published and on the basis of the circumstances that surrounded it. The dYdX Foundation makes no guarantees of future performance and is under no obligation to undertake any of the activities contemplated herein.

dYdX is a decentralised, disintermediated and permissionless protocol, and is not available in the U.S. or to U.S. persons as well as in other restricted jurisdictions. The dYdX Foundation does not operate or participate in the operation of any component of the dYdX Chain's infrastructure.

Nothing in this website should be used or considered as legal, financial, tax, or any other advice, nor as an instruction or invitation to act in any way by anyone. You should perform your own research and due diligence before engaging in any activity involving crypto-assets due to high volatility and risks of loss.

Depositing into the MegaVault carries risks. Do your own research and make sure to understand the risks before depositing funds. MegaVault returns are not guaranteed and may fluctuate over time depending on multiple factors. MegaVault returns may be negative and you may lose your entire investment.

The dYdX Foundation does not operate or has control over the MegaVault and has not been involved in the development, deployment and operation of  any component of the dYdX Unlimited software (including the MegaVault).

Crypto-assets can be highly volatile and trading crypto-assets involves risk of loss, particularly when using leverage. Investment into crypto-assets may not be regulated and may not be adequate for retail investors. Do your own research and due diligence before engaging in any activity involving crypto-assets.